SBP set to announce monetary policy shortly, significant cut in key interest rate expected

The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) will meet shortly for its final meeting of the year with most analysts expecting a cut of 200 basis points.

In its previous meeting held on November 04, the MPC had unleashed its most aggressive cut in the key policy rate, reducing it by 250bps to bring it down to 15%, marking the fourth successive round of monetary easing that began in June 2024.

Market expectations

A majority of market experts expect the SBP to continue with its monetary easing stance as the slowing pace of inflation has fuelled expectations of a fifth-consecutive reduction.

Brokerage house Topline Securities anticipated a policy rate cut of at least 200 basis points (bps).

In its survey, Topline said 71% of the participants expected that the central bank would announce a minimum rate cut of 200bps.

Among the participants who expect a cut, 63% see the interest rate cut by 200bps, 30% expect a cut of 250bps, and 7% anticipate a cut of more than 250bps. The remaining 29% expect a rate cut between 50-150bps, said the brokerage house.

Similarly, brokerage house Arif Habib Limited (AHL) anticipated a cut of 200bps.

In its survey, AHL found the majority 73.5% expect a reduction of 200bps. Additionally, 14.7% predict a 150bps cut, while 11.8% foresee a reduction of 250bps cut.

Moreover, newly-appointed Advisor to Finance Minister on Economic and Financial Reforms Khurram Schehzad also said the slowing inflation rate “should result in more monetary easing” by the central bank.

This will lead “to further decline in cost of capital for businesses and industries, and higher savings on debt servicing for the government resulting in an improved fiscal balance in the coming months/quarters,” said Schehzad in a post on social media platform X.

Previous MPC meeting

In its previous meeting, the MPC had cut the key interest rate by 250bps, exceeding market expectations.

The MPC back then observed that “inflation has declined faster than expected and has reached close to its medium-term target range in October. The Committee assessed that the tight monetary policy stance continues to play an important role in sustaining the downward trend in inflation. Moreover, a sharp decline in food inflation, favourable global oil prices and absence of expected adjustments in gas tariffs and PDL rates have accelerated the pace of disinflation in recent months.”

Since the last MPC, several key developments on the economic front have taken place.

The rupee has depreciated by 0.1%, while petrol prices increased 1.5%.

Internationally, oil prices lowered marginally since the last MPC and were hovering above $70 per barrel amid soft demand.

Pakistan’s headline inflation clocked in at 4.9% on a year-on-year basis in November 2024, lower than the reading in October 2024 when it stood at 7.2%.

In addition, the country’s current account posted a surplus of $349 million in October 2024 compared to a deficit of $287 million in the same month of the previous year. This was the third consecutive month of a current account surplus.

Foreign exchange reserves held by the State Bank of Pakistan (SBP) increased by $13 million on a weekly basis, clocking in at $12.05 billion as of December 6, data released on Thursday showed.

Total liquid foreign reserves held by the country stood at $16.60 billion. Net foreign reserves held by commercial banks stood at $4.55 billion.